How Errors In Calculation Led To Jump In Fuel Prices

An error in the fuel pump price calculation partly contributed to the jump in fuel prices announced by the Energy and Petroleum Regulatory Authority (EPRA) last month, as revealed by the Sunday Nation on Sunday August 2.

The energy regulator failed to correctly compute the prices in the June/July pricing, an error whose correction in the July/August fuel price setting caused a massive hike in pump prices.

Petrol prices rose by Sh11.38 to sell at the current rate of Sh100.48 per litre in Nairobi while a litre of diesel now retails at Sh91.87 after it was increased by Sh17.3.

A petrol station in Kenya. Source: Total Kenya

Petroleum PS Andrew Kamau disclosed the miscalculation was an oversight by the energy regulator after it under covered Value Added Tax on Super petrol, Diesel and Kerosene for the cycle of June 15 to July 14.

“There was a miscalculation by EPRA when they had not included excise duty in computing the VAT and that had to be corrected in the latest pricing review. This has now been corrected and since it was not the oil marketers’ mistake, there was no way to go back and ask them for what they didn’t collect,” Mr Kamau told the Sunday Nation.

In the monthly release containing the new pump prices, the regulator did not expressly disclose that the huge price increases were due to an error being corrected.

EPRA only mentioned the under recovery of VAT when explaining the price of Kerosene, which had not been imported during the month in review and whose “price has been maintained but adjusted for the under recovery of value added tax by oil marketing companies that occurred in the previous pricing cycle”.

After days of search for answers from the regulator, EPRA director-general Pavel Oimeke in response threw the blame on the oil marketing companies saying some of them had “misunderstood’ the taxation law, an error that was passed through to the pump pricing done by EPRA.

A petrol station attendant refuelling a car. Source: Daily Nation

“The compensation to oil marketing companies for under-recovered value added tax was due to the understatement of the taxable value in the pump prices. The error resulted from misunderstanding of Sections 13 and 14 of the VAT Act, 2013 by a section of oil marketing companies and when this matter was brought to the attention of EPRA and on verification of the affected entries, it was confirmed that only excise was being included as part of the vatable amount,” Mr Oimeke wrote.

The marketers had reportedly included only the excise duty as part of the taxable value rather than all taxes, levies, duties and fees in line with Section 13(3)(c) of the VAT, 2013 and the Tax Laws (Amendment) Act, 2020.

The Kenya Revenue Authority is said to have written to EPRA to question why the computation had been done in contrary to the law, which specifies that VAT computation for Super petrol, Diesel and Kerosene at import point differs from the one at the sales point,

At the import level, only excise duty is included as part of the vatable cost in line with Section 14 of the VAT Act, 2013 whereas at the sales point all taxes, levies, duties and fees form part of the taxable value.

The regulator revealed it was working on modalities to incorporate KRA and the oil companies in harmonising the petroleum taxation process to avoid such errors in the future but the marketers who spoke to Sunday Nation on condition of anonymity to escape victimisation questioned the pricing process.

“We don’t calculate pump prices, if there was an error on our side it ought to have been detected by EPRA, how comes it was passed all the way to the pump prices? The regulator has a whole legal department who should have helped them interpret the law correctly. This only tells you how easily pricing can be erroneous and you never know how many such mistakes have been made in the past. We need to audit the pricing regime because we have been victims of it as well,” an official of a multinational oil dealer said.

Kenya introduced the fuel price controls in December 2010 to provide for price stability and to save consumers from exploitative pricing by the fuel dealers. EPRA uses the landed cost of refined petroleum products plus the various levies taxes and pass through costs to set the prices every month.

The formula includes controversial levies like 0.5 per cent depot losses for oil dealers, essentially allowing them to lose millions of litres of product and get compensated by the consumers at the pump.

In the current prices, the dealers are allowed to recover losses of 0.5 per cent for petrol and 0.3 per cent for diesel. It means out of the 144 million litres of petrol sold in June, the dealers were compensated for an allowable loss of over 700,000 litres; translating to Ksh106 million based on June pump prices. The figure is higher after including the over 500,000 litres allowed for diesel.

The dealers under their supplier umbrella body, Supplycorr, have been pushing that the 0.25 per cent pipeline losses also included in the formula was part of the scheme to steal fuel which was being sneaked out from the Kenya Pipeline depots for sale by a crafty cartel.

The oil marketers even called for a stock audit at Kenya Pipeline depots in the heat of the protest that saw the suspension of senior managers at KPC, a forensic audit whose findings have not been made public more than two years since it was contracted to the London-based Channoil Consulting Limited.

The government collects seven levies and two taxes from each litre of fuel and the latest mix up in price calculation was based on a tax amendment that now allows for double taxation, with other taxes being used in determining the VAT.

Consumers have also began paying an extra Ksh5 per litre on the Petroleum Development levy.

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